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February 21, 2014

U.S. ECONOMY & REAL ESTATE
Q1 Roundtable Survey: Industry Confidence Up Modestly, Yet Policy “Headwinds” Remain — Including TRIA Expiration, Slow-Growth Tax Reform, Conditions Surrounding Future Interest Hikes

TAX POLICY
Camp Seeks to Revive Tax Code Restructuring Efforts With Legislative Draft Next Week


U.S. ECONOMY & REAL ESTATE

Q1 Roundtable Survey: Industry Confidence Up Modestly, Yet Policy “Headwinds” Remain — Including TRIA Expiration, Slow-Growth Tax Reform, Conditions Surrounding Future Interest Hikes  

U.S. commercial real estate markets continue their gradual recovery from recession — as reflected by improving fundamentals, transaction volumes and capital flows (including in non-“gateway” markets) — and will likely remain on a modestly upward trajectory over the coming year, according to The Real Estate Roundtable’s latest quarterly Sentiment Survey, released yesterday.

Q1 2014 image x200 Sentiment Index chart

The Q1 2014 Sentiment Index shows a lingering wariness among senior industry executives about prospects for a sustainable economic recovery

Yet, the Q1 survey shows a lingering wariness among senior industry executives about prospects for a sustainable economic recovery. Thus, despite a generally brightening economic outlook and recent bipartisan cooperation on the federal budget and debt ceiling, various policy risks continue to weigh on real estate markets. These include the:

scheduled sunset of the Terrorism Risk Insurance Act (TRIA) on Dec. 31, which could spark a job-killing commercial real estate credit crunch;

tax reforms that could cause major dislocation in real estate markets;

the economic conditions surrounding future interest rate hikes, which could put renewed pressure on valuations, complicate loan refinancing, and impede debt servicing.

The Sentiment Index is measured on a scale of 1–100, with anything above 50 considered positive. The “Overall Index” rose 2 points since the last quarter of 2013, to 69; the “Current Conditions Index” increased by 1 point (to 71); and the “Future Index” rose from 67 to 69 (which is where it was at this time last year). 

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“The slight uptick in our latest Sentiment Index shows our industry on a generally positive path — in keeping with broader macroeconomic trends — yet still not fully recovered, and still subject to policy-related risks,” said Roundtable Chairman Robert S. Taubman (Taubman Centers Inc.)

“The slight uptick in our latest Sentiment Index shows our industry on a generally positive path — in keeping with broader macroeconomic trends — yet still not fully recovered, and still subject to policy-related risks,” said Roundtable Chairman Robert S. Taubman (Taubman Centers Inc.) He continued, “U.S. policymakers must work to create a more attractive climate for job creation and investment as these are critical to real estate’s health — and as real estate goes, so goes the economy.”

Roundtable President and CEO Jeffrey DeBoer added, “As today’s survey shows, our industry generally has stabilized, and is poised to lead the economy forward once again — in the areas of job growth, GDP, tax revenue, and retiree investments held by U.S. pension funds. But for these contributions to materialize, Washington needs to foster appropriate risk-taking and entrepreneurial activity; provide more clarity on key policies; protect U.S. economic and homeland security; and enact positive, pro-growth reforms in the tax, immigration and energy policy spheres.”

As revealed by Federal Reserve Board minutes released this week, “a few” board officials argued at the Jan. 28-29 FOMC meeting that the “rules of thumb used by the Fed in the past, which prescribe an interest rate based on movements in the unemployment rate and inflation or economic output and inflation, point to the need for higher rates” (The Wall Street Journal, Feb. 20). 

However, that argument was “largely dismissed by other officials,” according to the WSJ — including Chairwoman Janet Yellen, who appears to show “no appetite” for raising rates anytime soon. Testifying before the House Financial Services Committee last week, she emphasized that the economy and labor markets are still not fully recovered, and that “headline” unemployment — now at 6.6% — is only one of numerous factors that should be looked at in gauging U.S. labor market conditions [Roundtable Weekly, Feb. 14]. 

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TAX POLICY

Camp Seeks to Revive Tax Code Restructuring Efforts With Legislative Draft Next Week  

House Ways and Means Committee Chairman Dave Camp (R-MI) next week plans to release his long-awaited “discussion draft” on tax restructuring, aimed at making the nation’s labyrinthine tax code “simpler and fairer for families and employers” and strengthening the economy by boosting wages and take-home pay for U.S. workers (CQ-Roll Call, Feb. 19). 

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House Ways and Means Committee Chairman Dave Camp (R-MI) next week plans to release his long-awaited “discussion draft” on tax restructuring

In a Feb. 19 memo to GOP colleagues (later shared with committee Democrats and the press), Camp said his upcoming proposal reflects exhaustive work by congressional staff, “countless hearings, meetings and invaluable input from job creators and families across the country.”

Camp’s hopes of introducing a reform proposal by year-end 2013 were delayed by a host of factors, including the government shutdown in October and associated debt ceiling crisis; controversy over “Obamacare”; bicameral negotiations to avoid another government shutdown (or U.S. debt default) in early 2014; partisan differences about whether tax reform should raise new revenue; and intra-party divisions among Republicans about key aspects of reform.

Camp has previously pledged to try to lower top tax rates to 25 percent — namely the 39.6 percent individual tax rate and 35 percent corporate tax rate. Many believe this would require limiting popular tax provisions, such as the home mortgage interest deduction and the special tax deduction for domestic manufacturing (Bloomberg, Feb. 19). 

In The Roundtable’s view, these areas of taxation must not be “de-coupled,” and policymakers should reject efforts to offset the cost of a corporate rate cut by simply eliminating or scaling back tax provisions that allow taxpayers to recover the basic costs of doing business (e.g. depreciation deductions and business interest deductibility).

2014 Tax Section image Policy Agenda x200.

 The Roundtable's Tax Policy section of its 2014 National Policy Agenda is available here.

To help guide tax-writers’ efforts this past year, The Roundtable submitted a series of comment letters to the House and Senate tax committees identifying real estate’s policy priorities with any tax code restructuring. Recalling the economic dislocation that resulted from the ill-conceived 1986 Tax Act and its lack of appropriate transition rules, The Roundtable maintains that any new tax system should: 

Promote economic growth across all sectors of the economy 

Be relatively simple 

Assure predictability for long-term investment 

Treat real estate consistently with other types of businesses 

Refrain from giving new real estate activities an advantage over existing ones 

Provide for a reasonable transition regime that minimizes dislocation in real estate markets

Although Camp reportedly has preliminary support from the House GOP leadership, he will likely continue to face a series of hurdles in his latest effort, including anticipated Democratic opposition to his revenue-neutral approach and a shortened schedule due to this year’s midterm congressional elections.

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The new Senate Finance Committee Chairman, Sen. Ron Wyden (D-OR)

Additionally, Camp’s tax reform ally over the past year — Senate Finance Chairman Max Baucus — has left Capitol Hill to serve as President Obama’s ambassador to China.  The new Finance Chairman, Sen. Ron Wyden (D-OR), has said he will make tax “extenders” his immediate focus, rather than comprehensive reform.

At The Roundtable’s 2014 State of the Industry gathering in late January, Wyden appeared to have a good understanding of real estate’s concerns regarding the tax reform discussion drafts unveiled by Baucus in November, emphasizing the importance of transition rules that “do no harm” to existing real estate activity or investment (Roundtable Weekly, Nov. 22).

He also indicated that any tax restructuring proposals unveiled thus far are merely a starting point for discussion. 

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For questions about content/editorial matters, please contact The Roundtable's Xenia Jowyk at xjowyk@rer.org or (202) 639-8400. For layout or email delivery issues, contact RER's Scott Sherwood at rweekly@rer.org or (202) 639-8400.

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